Table of Contents

Foreword

  • This guide explains how to use a data-driven approach, along with industry expertise and best practices, to evaluate and modify your clients’ annual pharmacy benefits plan so that they can achieve lasting savings and maintain affordable pharmacy benefits for their employees.

In this guide, you’ll receive answers to these important questions:

  • What market factors are driving my self-funded clients’ pharmacy benefits spending?
  • How are prescription drug pricing and prescribing practices impacting pharmacy benefits costs?
  • What are the pros and cons of different types of pharmacy benefits contracts?
  • How can I negotiate a more competitive pharmacy benefits contract?
  • What strategies can help my clients tackle high-cost specialty drugs?
  • How will a pharmacy benefits performance audit benefit my clients?

Chapter 1:

High-Impact Pharmacy Benefits Trends

When it comes to employee benefits, pharmacy has become the hottest topic, driving headlines that create fear and uncertainty for all client stakeholders—CFOs, HR and benefits managers, and even employees and members. Much to everyone’s dismay, spending associated with this critical benefit has skyrocketed over the last 10 years, while total utilization (the number of scripts people are taking) has remained constant. Plan sponsors are feeling particularly vulnerable as they seek to protect their plan and members from risk, while still providing affordable access to medications.

Consider this: Your client is faced with a script for Zolgensma. 

The good news: It’s the first gene therapy approved for use in the U.S. that miraculously cures a form of Muscular Dystrophy.

The bad news: It comes with a hefty price of $2.1M, roughly nine times the median sale price for a home in the U.S. and 33 times the national per capita¹. We have reached the point where a single, large unexpected claim has the potential to financially devastate a pharmacy benefit plan. You’re left wondering, how did we get here and what can we do about it? 

 

“We have reached the point where a single, large unexpected claim has the potential to financially devastate a pharmacy benefit plan.”

The Growth of Prescription Drug Spending

Pharmacy has become one of the fastest-growing components of healthcare spend and is used more than any other benefit. In fact, more than half of members use their pharmacy plan each year, with an average of 10 scripts per eligible member, per year for a self-funded plan.2 There has been a 40% increase in the percentage of healthcare spend since 2008.3 Of every healthcare dollar spent by plan sponsors, $0.21 is now going to pharmacy.4 Many plans now spend as much as $0.30 per dollar on prescription drugs. The current trajectory of healthcare spending cannot be sustained moving forward.

$0.21 of every healthcare dollar spent by plan sponsors is now going to pharmacy 4

Subtle Rise of AWP

Average wholesale price (AWP) inflation, an increase in the average wholesale price of medications, ran at a rate of 6% year-over-year when averaged across all drug types (brand, generic, and specialty). 5 This number has come down in recent years, but it still significantly outpaces the national inflation rate. Pharmacy inflation is rising at a rate three times greater than the national Consumer Price Index yearly inflation rate of 2.1%.6 While it may seem that drug prices are rising at a very high rate, the average wholesale price AWP of drugs is not the most significant trend driver affecting employee benefit plans.

~6% Year-over-year increase in the average wholesale price (AWP) of medications5

Highs & Lows of Utilization

A more important factor impacting prescription drug trend is utilization, which has two components: the number of scripts and the drug mix of a given population. An increase in the number of scripts isn’t always a bad thing, as many chronic conditions are effectively controlled by low-cost medications. In fact, effective treatment results in an overall decline in healthcare spending realized through medical savings, which is a very good thing. For example, combining medication that lowers blood pressure with medication that lowers cholesterol has been shown to reduce first-time strokes by 44%.7 That is a win for plan sponsors.

The issue is the increasing use of high-cost medications that don’t achieve the same therapeutic outcomes as lower-cost alternatives and that don’t help to reduce the total cost of care. Some therapy classes driving spend through utilization include anti-diabetics, anti-inflammatories, autoimmune therapies, HIV/AIDS drugs, and oncology medications. Many high-cost drugs in these categories are readily available through the retail channel and slip through specialty medication claim management programs that are designed to review utilization prior to the claim being paid. A common example of this is a person prescribed an expensive diabetic medication for the purpose of controlling their weight when that indication is not approved by the U.S. Food and Drug Administration (FDA).

Total utilization has remained constant while pharmacy spending on drugs has skyrocketed.

Aplenzin
a $42,000 per year drug used in the treatment of depression, is sometimes prescribed off-label for migraines, while approved, lower-cost migraine treatments are available.

The Shift to Specialty Drugs

By far, the most significant driver of commercial drug trend is the rapid growth in the innovation, availability, and use of high-cost specialty medications. The specialty market experienced amplified competition in recent years with groundbreaking advances in the cancer and rare disease (orphan drug) categories. Ten years ago, did we think we were going to be able to cure Hepatitis C or treat individuals with a peanut allergy with medications? No, and yet we have. The innovation is life-changing, even life-saving, but it comes at a hefty cost.

A Historical Turn

The mix of drugs being used changed drastically over the last 10 years. Where pharmacy benefit spending centered around brand and generic drugs in 2008, those categories have taken a backseat as high-cost specialty drugs have taken center stage. The specialty drug category, which includes treatments for rare diseases and medicines requiring special handling, now accounts for 40%-50% of overall prescription drug spend.

According to the IQVIA Institute’s Medicine Use and Spending in the U.S. report, the shift in drug mix from traditional to specialty medicines occurred across all distribution channels.8 Their analysis shows that specialty medicines accounted for 46.5%, or $407, of the $876 spent per person per year on medicines in 2017. For retail and mail-order distribution channels, specialty accounted for 37.4% of spending while comprising only 1.9% of total prescription volume.

Specialty Drugs Account For:8

1.9% of Overall Rx Claims and yet 46.5% of pharmacy spending

New Drug Development

With the potential for hitting it big with the next blockbuster drug, manufacturers continue to focus on specialty drug development. Specialty drugs are vastly more expensive than their traditional drug counterparts, often costing more than $3,500 per month, per patient – and some costing much more. The average annual cost of 61 widely used specialty drugs for treating chronic conditions reached roughly $79K in 2017.9 This is nearly triple the average annual cost for the exact same specialty drugs in 2006.

Potential Blockbuster Drugs in 2020: 10, 11

  • Thyroid Eye Disease: Teprotumumab
    Peanut Allergy Vaccine: Palforzia
    Alzheimer’s: Aducanumab
    Acute Migraine: Ubrelvy – Ubrogepant
    Relapsing Multiple Sclerosis: Ozanimod
    Treatment-Resistant Major Depressive Disorder: Buprioprion/dextromethorphan

These transformative advancements in medicine are very exciting, but the associated cost can be exorbitant.

The Shift to Specialty Drugs

Orphan Drugs
An emerging sub-class of specialty medications are orphan drugs. An orphan drug is a pharmaceutical product that treats a rare condition or disease. Status is granted by the FDA for drugs that target a population with 200 thousand or fewer people. Smaller pharmaceutical manufacturers are highly concentrated in this market because they can fast track these drugs to market and set the market price. One in 10 people have a rare condition that could be targeted for treatment with an orphan drug.12 The mean cost per patient per year of an orphan drug is $150,854 – with some orphan drugs costing 10-20 times more.13 In some instances, as in our Zolgensma example, treatment can cost in excess of $2 million.

Biologics
More than 60% of orphan drugs are biologics. Biologic therapies are large molecule specialty medications made from living cells. Despite the challenges of manufacturing biologics, they serve a significant role in the drug market and have an equally significant impact on pharmacy spend. There are more than 350 biologics on the market, some of which continue to dominate spending. Humira and Avastin, for example, have maintained record sales growth over the last decade, with sales growing by 8.2% and 9.5%, respectively14. Spending on biologics has grown at an average rate of 11.2% since 2012, as a variety of biologic treatments for autoimmune disorders, immunology and cancer have entered the market.15

Expected Specialty Drugs Patent Expirations Represent a $17 Billion Market Opportunity in 2020-2119

Some of the drugs expected to lose patent protection this year include:

Kidney cancer – Inlyta
Rheumatoid arthritis – Kineret
Age-related macular degeneration, macular edema – Lucentis
Anemia associated with chronic kidney disease – Mircera
Colorectal cancer – Vectibix

Drug patent expiration does not imply biosimilar availability.

No generics or biosimilars have been approved yet for these therapies.

Biosimilars

An FDA-approved biosimilar is a biological product that is highly similar to and has no clinically meaningful differences in terms of safety, purity, and potency (safety and effectiveness) from an already FDA-approved product, called the reference product. Biological products are highly complex and often used to treat patients with serious and life-threatening conditions. Biosimilar medications are designed to create competition, increase patient access, and potentially reduce cost of important therapies. There are 26 FDA-approved biosimilars in the U.S.

In 2019, the FDA approved 10 biosimilars covering a wide range of conditions, such as rheumatoid arthritis, various other forms of arthritis, plaque psoriasis, and a variety of cancers and blood disorders.16 Among these new approvals are two competitors for the blockbuster drug Humira, which is used to treat rheumatoid arthritis and Crohn’s disease, and long-awaited biosimilar approvals for the anti-cancer biologic agents Avastin and Herceptin.

Biosimilars are expected to become a larger market presence over the next several years as more than 70 biologic drugs lose patent protection, representing a potential $46.2 billion market.17 However, biologic patent expiration does not necessarily imply biosimilar availability. The availability of biosimilars is highly variable due to litigation, patent challenges, the FDA’s establishment of 351(k) pathway, and other factors. There may not be a biosimilar alternative available in the market for the biologic upon patent expiration or even for some time after, meaning that it could be years before consumers and plan sponsors see biosimilars on the market.

There is potential for the availability of existing biosimilars to help plan sponsors reduce pharmacy spend, however, the market has been slow to accept them. In a 2018 Health Research Institute survey of clinicians, of those who prescribed biologic drugs, 73% said they rarely or never prescribe biosimilars.18 Mostly, plan sponsors seem to be using their presence as a tool in negotiating prices of existing drugs. It’s difficult to tell how each new drug launch will impact the market going forward.

Managing Drug Costs in the Specialty Era

Undoubtedly, there is a very real problem of prescription drug affordability for both plan sponsors and their members that must be addressed. Considering again the reality of your client receiving a pharmacy claim for Zolgensma, the magnitude of the problem can be fully realized. The specialty drug shift is a problem that you and your clients can’t afford to take a “wait and see” approach to solve.

Today, most employer pharmacy benefit plans are seeing that 1% of prescription claims account for roughly 40%-50% of plan costs.2

Now more than ever, employers should be paying attention to specialty drugs and taking action to ensure prescription drug utilization isn’t having a detrimental impact on their pharmacy plan spend.

Traditional Strategies Aren’t Working

Historically employers mitigated year-over-year trends by shifting utilization patterns (i.e. brand to generic conversion). Although that is still an effective approach, it’s not enough. Employers also tried shifting costs to members to relieve their budgetary pressures. That strategy too has reached its tipping point, as costs have become unbearable for members as well. Reports state that 1 in 5 U.S. adults (22.9%) say that they or someone in their household was unable to afford drugs prescribed to them in 2019.20 It’s just not feasible to raise deductibles or copays high enough to help the employer sustain that kind of expense. Simply applying plan design strategies alone will not work anymore; we must proactively manage drug trend instead.

The Call for Lasting Affordability

Employers who provide their employees with affordable access to medications want to help them improve or maintain their health while shielding them from risk. It’s hard to debate the cost of care versus the value of life, and none of us can ultimately make the decision for plan sponsors. What we CAN do is advise when these prescriptions are medically necessary and appropriate with the goal of reducing total cost of care.

Your employer clients are looking to you for help establishing a sustainable pharmacy benefit that addresses these pain points and helps them stay afloat. What new and innovative strategies will you bring to the table that will help them experience a positive shift in their benefit plan offering despite the volatile pharmacy benefit environment? How will you identify and address their specific trend drivers to help them achieve the best financial and clinical outcomes?

Chapter 2:

Better Pharmacy Benefits Contracts

The issue of pharmacy benefit affordability has never been more prevalent, with recent reports projecting that pharmacy spend will grow 6.1% year-over-year for the next seven years.5 In fact, pharmacy costs as a percentage of overall healthcare spend have increased 40% since 2008.3 With all the complexity swirling in the industry, navigating pharmacy benefits is more complicated than ever before. It can easily feel overwhelming if you do not know where to start.

Optimizing your self-funded clients’ pharmacy benefit plan begins with negotiating a contract that has competitive rates and rebates, and clearly defined, client-friendly terms.

Pharmacy benefit managers (PBMs) have many iterations of their contracts. There may be some standard language used across the board, but each contract contains negotiated terms that can significantly alter the rates and rebates, and vary the contract’s performance in ways clients do not understand. When you can identify vague or misleading language and avoid potential hazards, you will be well on your way to achieving an optimized pharmacy benefits contract for your self-funded clients.

Standard Contract Types

Having a clear understanding of the contract options offered by the PBM can provide valuable insight into what your clients can expect and how the PBM benefits from the arrangement.

  • Traditional Contract PBMs receive revenue from a variety of sources, including spread pricing, mail order fees, retaining a percentage of the drug rebates, data sales, and other ancillary fees. Traditional contracts typically offer more aggressive performance guarantees because the PBM has more upside.
  • Transparent/Pass-Through Contract PBMs have limited sources of revenue, including a flat administration fee, mail order fees, data sales, and other ancillary fees, to name a few. In a pass-through deal, retail discounts and rebates are passed along to plan sponsors in return for higher administrative fees. These contracts offer less aggressive financial guarantees because the PBM is taking on greater financial risk. There are some PBMs that pass-through all discounts in exchange for an extremely high administrative fee.
Both contract types have their pros and cons. Fully examine these options, and decide which path best aligns with your clients’ objectives.

Conduct a careful analysis before deciding which type of pharmacy pricing arrangement works in your client’s best financial interests.

Do not assume that pass-through arrangements will save you money!

Tips for making a solid recommendation:

  1. Never rely on a PBM’s analysis of the value of its own proposal. Instead, work with an independent consultant that is trained to interpret the contract and identify terms that are not aligned with the employer’s best interests.
  2. Have your consulting partner run a separate analysis of the employer’s claims data to account for all discounts net of all PBM fees. Again, do not let the PBM do this.
  3. Make sure you understand the PBM contract’s terms regarding how and when minimum guarantees are measured and trued up.
  4. If you are considering a pass-through network arrangement, make sure the contract gives your client the ability to review contracts between the PBM and the network retail pharmacies to ensure correct claim pricing has been applied.
  5. For traditional contract arrangements, your contract should stipulate your right to audit the PBM; your contract should allow you to independently validate the PBM’s pharmacy network discount performance at the client level.

Top 5 Contracting Best Practices

Next, review the contract itself to be sure you clearly understand the terms and conditions. The reality is that pharmacy contracts are only as good as the sum of their parts, and there are many parts of a pharmacy arrangement that can cost your clients significant dollars – some of which are not obvious at first glance.

In fact, one misstep of vague or unclear language in a lengthy contract may lead to unnecessary prescription drug spending. More than one contract misalignment may put the benefits plan in serious financial jeopardy.

Focusing on these five key areas will help your clients avoid the most common pharmacy benefits contracting pitfalls and lead you to a more competitive, client-friendly deal:

  1. Length Of Contract Term
  2. Drug Definitions
  3. Lowest-Of Pricing
  4. Rebate Sharing
  5. Client-Specific Financial Guarantees

1) Length of Contract Term

Most PBM contracts are long‐term, three‐year arrangements. While it may seem like good financial sense to lock in a long-term deal, it typically doesn’t
pan out in the world of pharmacy contracts. Your clients may not realize their three-year contracts aren’t always designed in their best interest. Long-term
arrangements often result in stale pricing in the second and third year, and a limited ability to respond to the rapidly changing pharmacy marketplace.

Additionally, most PBM contracts make it nearly impossible for your clients to exit those long-term contracts early without paying a stiff financial penalty
to do so. They may realize too late that they can’t leave their contract for any reason, including to leverage changes in the market. As a result, they may be
forced to wait out their long‐term arrangement and miss out on annual opportunities to improve their contract.

2) Drug Definitions

Unfortunately, PBMs aren’t always clear with how they classify brand and generic drugs. Some PBMs use their own proprietary – and often ambiguous – definitions instead of using an industry-accepted pricing standard, such as the Medi-Span Prescription Pricing Guide definition. Their contract definitions (or lack thereof) of “brand drug” and “generic drug” allow them to misclassify drugs, and even to classify drugs one way for one purpose and another way for another purpose.

These misclassifications make it easier for them to meet their pricing guarantees with your clients during reconciliation and to pay less to clients in rebates. Because most contracts require PBMs to pay a specified rebate amount “per brand drug script,” the PBM may classify more drugs as generics for the purposes of calculating rebates to decrease the rebate dollars owed to your clients.

Furthermore, when PBMs renew contracts with existing clients or compete to win new business, they can offer what appear to be better AWP discounts and claim to provide drugs at lower prices. However, the PBM’s newly offered discounts may result in no better — and perhaps even worse — aggregate prices than they previously provided.

Best Practice: Ensure that any claim with a generic indicator will be included in the generic guarantee, and any claim with a brand indicator will be included in the brand guarantee (as defined by Medi-Span). Generics should be in an all-in generic guarantee when brands and generics are classified by Medi-Span, not the PBM’s arbitrary definition.

3) Lowest-Of Pricing

With prescription drug spending as high as it is, why should your clients’ members pay more than is necessary to fill their prescriptions? The reality is, they might be. Many payers are locked into pharmacy arrangements that dictate their members pay the set copay amount, even when the drug is available for a lower price under the pharmacy’s cash price or the PBM’s negotiated discount for that medication.

This practice, called a “copay clawback,” occurs when PBMs recoup money from pharmacy retailers and the member has no idea what is happening behind the scenes. The member picks up a script at the pharmacy and pays the typical copay amount. Unbeknownst to the member, the actual true cost of the medication is less than their plan’s copay amount. Ultimately, the pharmacy benefit manager pockets the difference between the true cost and the copay, with most members never realizing that a cheaper cash price was available. Many states have banned this practice, but some of your clients and their members may still be at risk if they’re not protected by their pharmacy benefits contract.

Best Practice: Contracts should be negotiated with straight-forward language that guarantees members always pay the lowest possible price at the pharmacy.

Patients overpay for prescriptions 23% of the time, analysis shows.21

4) Rebate Sharing

Drug rebates function as a drug manufacturer’s strategy to increase market share for its products. Rebate amounts are negotiated between the drug manufacturer and each PBM for each specific drug product. The more a drug is used, the more rebate dollars are sent to the PBM. In practice, PBMs receive the rebates from manufacturers after a period of about six months because they determine the rebate amount according to actual pharmacy plan utilization. They share the vast majority of those dollars with your clients, following the terms of their contract.

For clients with an optimized rebate contract, rebates offset up to 30% of their total drug spending in 2019, with similar results expected this year.2

However, unclear contract language can prevent your clients from realizing this potential for their pharmacy benefits plan. Typical hidden contract language can mean less than competitive terms. For example, there may be no defined guaranteed rebate amount. Or your clients could see a diminished per-brand claim payment due to language specifying that the plan’s average days’ supply cannot fall below 30 days for retail or 90 days for maintenance/mail order.

Best Practice: Review the rebate terms to ensure they are competitive year after year, with a minimum guaranteed rebate amount and no restrictions.

7 Common Rebate Pitfalls

1. Rebates based on a prorated days’ supply – reduces rebate value

2. Medical admin fee credit in lieu of rebates – rebates are not dollar-for-dollar

3. Not having minimum rebate guarantees

4. Not having rebate escalators in 3-year contract arrangements

5. An overabundance of rebate exclusions (i.e. multi-source brands)

6. Rebates not paid on specialty drugs, or specialty claims being paid a lower non-specialty rebate

7. Retail rebates being paid on mail-order claims

Client-Specific Financial Guarantees

Regardless of a group’s size, one thing remains consistent: the pricing terms in the contract are not always a predictor of how the client is performing. Contracts typically contain guaranteed terms, but it’s a huge red flag if those guarantees are not made at the client level. Client-level guarantees ensure terms are met according to a group’s specific performance.

All guarantees in your clients’ pharmacy contracts should be clear and should support active management of their pharmacy plan. For example, some medical carriers use language like “actuarially estimated charges” for their guarantees. If you’re seeing this type of vague language, your clients likely don’t have guarantees specific to their contract and pricing terms. It’s also important to be aware of any minimum enrollments required for pricing guarantees, or discounts tied to mandatory participation in utilization management programs.

Best Practice: Ensure client-level guarantees and full contract value are being provided. Confirm the integrity of the pharmacy arrangement and recover any shortfalls in the contract performance.

Optimize Your Clients’ Rx Contract

As a trusted advisor to your clients, you have a responsibility to provide them with strategic guidance about their benefits program. When your self-funded clients are tied to a single, pre-determined contract that does not allow you to negotiate terms critical to managing cost trends, the door is open for red-flag terms and conditions that may not be in their best interest.

Securing an optimized pharmacy contract involves a careful review of the terms to check for clear language and competitive pricing. An expert can help you identify potential risk areas and negotiate a more client-friendly arrangement that is structured to achieve your self-funded clients’ benefit goals – not the PBM’s.

Contracting Best Practices Cheat Sheet

Consider this your handy guide to optimized pharmacy benefits contracts.
Use it to help direct your conversation with your self-funded clients.

  • How do you feel about your current pharmacy benefits contract?
  • What data are you using to help you evaluate the financial and member impact of plan changes before you make them?
  • What is your long-term strategy to manage prescription drug spend?
  • Can you manage and adjust the pharmacy benefits plan as a stand-alone entity?
  • What visibility do you have into the pricing terms and performance data for your plan?
  • How are high-cost specialty drugs affecting your bottom line?
  • What are your rights to audit and exit the contract, if necessary?

Chapter 3:

Maximizing Pharmacy Benefits Savings With Minimal Member Disruption

As we detailed in chapter one, prescription drugs now account for 18 to 25 cents of every healthcare dollar spent by plan sponsors, with some plans paying as much as 30 cents.4 Typically, just 2% of members drive ~50% of the cost.8 By and large, Americans are not taking any more medication today than they were ten years ago, but spending continues to rise year-over-year. How can that be?

Certain costs — for instance, for new and effective therapies — can be justified. But expenses also can accrue from products that offer little or no value relative to available alternatives. There are complicated, numerous reasons that this occurs. Because the pharmacy ecosystem is opaque, the forces driving price increases have remained poorly understood.

Self-funded employers need cutting-edge, contemporary clinical pharmacy management strategies.

Ensuring your clients are not overpaying for prescription drugs requires an understanding of the role that drug manufacturers, prescribers, and PBMs have in drug pricing and utilization. This visibility is essential to being able to implement sustainable clinical strategies that help direct your clients’ pharmacy dollars to pay for the most appropriate drugs for their members. The goal is to ensure they are spending no more or less than is necessary to maintain employee health.

Manufacturer Pricing Strategies

Microeconomics explains the normal relationship of supply and demand and how it impacts the pricing of goods and services. Changes in supply and demand influence market price and then a price change influences consumers’ decisions to purchase. In the case of drug pricing, there are several complicating factors that alter this dynamic and lead to an overly inflated market.

Patent Extensions

Pharmaceutical companies typically file for a patent as soon as research on a new drug begins. The initial patent grants them 20 years of exclusive rights to produce that drug; however, it’s not unusual for it to take 15 of those 20 years to complete R&D and receive FDA approval to bring the drug to market. When this happens, the manufacturer has just five years to make a profit before generic drug players enter the market and compete on price.

To protect their investment, manufacturers look for ways to block competitors and maintain exclusivity long after the original patent expires. In what could be considered short-cut moves in their product development roadmap, some drug manufacturers choose to compete with existing medications by inexpensively producing higher-cost alternatives. By changing an inert ingredient or the delivery mechanism, they can patent a “new” drug and charge a higher price without creating any additional clinical benefit. While these practices are legal, they are wasteful and often catch employers and members unaware.

A classic example of this is Abbvie’s blockbuster drug Humira, the second best-selling drug of all time. Record-breaking sales and profits are connected to unprecedented tactics by AbbVie to prevent competing alternatives from coming to the market. As a result, the U.S. list price of the standard 40 mg Humira injectable pen more than tripled from 2006 to 2017, with the price for a one-year supply soaring from $16,636 to $58,612 – a compound annual growth rate of over 12%.23

Evergreening

Evergreening is a primary technique used by pharmaceutical manufacturers to extend patent exclusivity for their drugs. This practice involves making small changes to existing drug products to create a new drug product, effectively preventing generic drug alternatives from entering the market. The problem with this practice is that the changes made do not improve the efficacy of the drug in any way, bringing no additional clinical value to consumers despite a much higher
price tag. We refer to these medications as Low Clinical Value Drugs.

A perfect example occurred recently with the drug Vimovo, which was approved in 2010 to treat arthritis pain. Vimovo is a combination of two well-known ingredients: naproxen, also known by the brand name Aleve, and esomeprazole magnesium, also known by the brand name Nexium. Aleve and Nexium are two inexpensive, over-the-counter (OTC) drugs that are readily available in generic form for approximately $40 per member, per month. However, when the manufacturer combined the drugs to create a new pill, the patented medication became considered a specialty medication, resulting in dramatic price increases. Instead of paying $40 a month for OTC drugs, with Vimovo, the members’ costs were sometimes reduced to $0 with a manufacturer-provided coupon while the employer costs went from $0 to $3,252.

Standard evergreening techniques include:

1 “Unique” dosage forms: New ways to administer the drug
2 “Unique” strengths: Introducing a 10mg tablet when taking two 5mg generics would work
3 Delivery devices: Introducing a different, more expensive delivery mechanism, such as a nasal spray instead of an oral inhalant
4 Combination medications: Combining two or more generic medicines to make a new medication
5 Multiple product packages: Creating a new package of two or more already available medications, often generic drugs
6 Different coloring: Changing the color of the drug itself

Parity-Priced Medications

Another hidden pricing tactic used by pharmaceutical manufacturers is parity pricing, which drives additional revenue for manufacturers at the expense of unsuspecting providers, patients, and payers. It occurs when the manufacturer charges the same dollar amount per unit, regardless of the strength prescribed (e.g., the 5 mg, 10 mg, and 20 mg tablet cost the same amount). Providers, not knowing this is the case, may prescribe two 10 mg tablets instead of one 20 mg tablet, doubling the cost of the prescription.

Negotiated Rebates

Drug manufacturers set list prices, but list prices don’t reflect the discounts given and rebates paid that reduce the net amount the manufacturer ultimately receives for its drugs. Three powerful PBMs dominate the pharmacy industry, and because these Fortune 100 companies manage more than 75% of pharmacy claims,25 they have the best leverage in negotiating rates and rebates with drug manufacturers. Rebates are money refunded to the PBM from the manufacturer, often in exchange for giving their drug preferred formulary placement. Better formulary placement — or a lower out-of-pocket cost to the consumer — means more sales of a product. In return, PBMs request price concessions from the pharmaceutical company.

Understanding the relationship between list prices and rebates is important because it informs how PBMs make decisions about which drugs to place on the formulary and how prescriptions are approved or denied. These decisions align with the PBM’s goals of increasing profitable earnings for their shareholders, but rarely benefit and may even work against plan sponsors’ cost reduction goals.

Provider Marketing

Most doctors are incredibly honest, ethical people, but this does not make them immune to the influence of drug manufacturers. These days, direct marketing to physicians typically takes the form of detailing – a practice where pharmaceutical company sales representatives visit with individual doctors to tell them about their products. The average detail visit is less than 15 minutes in length, and it typically involves providing some brief information like a study or pamphlets. Quite often, it consists of giving a small gift and leaving behind some combination of free samples, coupons, and drug discount cards to reduce or eliminate patient copays for expensive medications.

By overcoming the barrier of high out-of-pocket expense for consumers, drug companies know they can persuade physicians and patients to give these medications a try — betting that once the consumer is on the therapy, they won’t switch. While the member share goes down, potentially to $0, the employer is left footing the additional expense for a medication that may cost 2-10x more than clinically equivalent alternatives.

Direct-to-Consumer Marketing

Through direct advertising of drugs to consumers, drug manufacturers further impact provider prescribing habits. Everyone in the ads appears happy, usually dancing, or riding a bike — they just look like they feel healthy. People are led to believe a) the drug will be effective (which is often not the case), and b) that they should replace their old therapy with the newer one because it’s better (again, which is often not the case). They show up to the doctor’s office to ask for the specific drug by name. But does that work? Aren’t physicians smart enough to say no if the drug therapy isn’t the right one for the patient?

In a recent survey, 27% of doctors admitted prescribing a medication of questionable value simply to satisfy a patient’s request.26 Providers are, by nature, compassionate, empathetic people who want to make their patients happy. With a coupon in hand to negate any out-of-pocket cost, the patient and provider often agree, “it’s worth a try.”

Who Defends the Plan Sponsor?

While most prescription drugs brought to market represent medical breakthroughs and priceless treatments, some simply do not. Whose job is it to sort through it all and determine whether a drug is necessary, safe, and cost-effective? Who is looking out for the plan sponsor in the healthcare value equation?

Contrary to popular belief, it is not the role of the FDA to determine if a drug is reasonably priced based on its clinical value. FDA approval of a drug simply means that the Center for Drug Evaluation and Research (CDER) has reviewed data on the drug’s effects and has determined the drug provides benefits that outweigh its known and potential risks for the intended population. The FDA does not compare the efficacy of one drug against another to determine which is better, nor does it consider the price of the medication in making a determination.

Healthcare providers want to ensure that the patients they care for can afford the treatment they recommend. The problem is they often don’t know how a PBM’s formulary is structured, which drugs are covered, or even what a particular drug costs. This is why couponing and copay assistance programs are so effective at influencing providers’ prescribing. In essence, providers know that irrespective of their pharmacy benefit, their patients will pay nothing, or close to nothing, for the therapy, and they have no visibility into what it costs the payer.

Retail pharmacists are responsible for controlling and dispensing both prescription and non-prescription medicine. As part of the extended care team, they provide advice about health issues, symptoms, and medications in response to customer questions. They check for potential drug interactions, provide patient counseling, and help to address patient concerns with out-of-pocket costs, typically contacting the provider to suggest alternatives for non-covered drugs or those with a high copay or deductible. Once again, their focus is on the patients’ portion of costs, not the payers’.

PBMs are the self-insured employer’s first line of defense against rising prescription drug costs. As previously outlined, they negotiate with drug manufacturers and pharmacies to purchase medications at a lower price, and they pass a portion of those savings on to plan sponsors. Net prices are typically lower than list prices, but because of the rules of engagement around pharmacy benefit managers and manufacturers, the actual cost to the PBM is often opaque. That’s where things start to go wrong.

Remember, the PBMs work hard to negotiate generous rebates in exchange for giving a drug preferred placement on their formulary. Instead of placing the lowest-priced drug on the formulary and passing the savings to insurers, pharmacy benefit managers may simply supply the drug with the highest rebate to boost their profits. It is logical to conclude that their automated, algorithmic-driven utilization management programs, including their prior authorization processes, may also be biased in favor of highly rebate-able drugs.

Top 4 Clinical Management Best Practices

1) Formulary Optimization

A well-designed drug formulary manages access and cost for thousands of medications used to treat hundreds of conditions. Using a tailored approach, an expert should examine the employer’s claims data to identify costly drugs that provide little clinical value for members and discuss options for removing these drugs with you and your client. Removing low clinical value medications prevents members from utilizing expensive medicines that have safe, equally effective, lower-cost alternatives available in the marketplace. By targeting a few high-cost drugs that are posing the most considerable risk to your clients’ benefits plan, your clients can avoid unnecessary costs with minimal member disruption.

A truly optimized formulary contains only the most cost-effective, clinically appropriate drugs.

2) Utilization Management

Utilization management lays the groundwork for optimal prescription drug management and helps ensure that all utilized medications are appropriate, safe, and effective – at the lowest cost possible. Utilization management is designed not necessarily for cost containment, which is a benefit, but also for patient

safety reasons. Guiding criteria are developed using the FDA-approved indications for dosing, national guidelines developed by reputable sources, and critical
studies outlining benefit-risk ratios.

Utilization management consists of these protective strategies, each of which plays a role in a continual process focused on delivering appropriate drugs to members:

  • Quantity Limits alleviate safety and cost concerns for certain medications by limiting inappropriate drug quantities.
  • Step Therapies emphasize the use of generic or lower-cost brand drugs before moving to second- or third-line, more expensive medications.
  • Prior Authorizations review exception requests to the drug formulary, exceptions for quantity limits, step therapies, specialty medications, or other criteria specific for those authorizations.

3) High-Dollar Claim Reviews

Adding an umbrella protection strategy is another way to ensure the right patient receives the right drug at the right time and in the right dosage. A high-dollar claim review involves having an independent licensed pharmacist assess the medical necessity, dosage, and quantity of any drug that exceeds a pre-defined pricing threshold for a 30-day supply, including both brand and generic prescriptions filled at retail pharmacies.

This type of program mitigates expenses associated with off-label prescribing (i.e., prescribing a diabetic drug for weight loss) and inappropriate dosing (quantity or strength exceeds FDA-recommended guidelines), as well as pharmacy keying errors and even fraud. The review process creates an audit trail for you and your clients, providing crucial visibility into which drugs are being approved or denied.

The Case of Victoza & Trulicity 

Diabetic drugs Victoza and Trulicity are two high-cost medications intended to treat diabetes but sometimes prescribed for weight loss, which is an off-label indication. There are two problems with this: 1) off-label drug usage is a significant safety concern, and 2) pharmacy benefits plans rarely cover weight-loss drugs. Without a clinical review, Victoza and Trulicity prescription claims for weight loss would slip through the proverbial cracks because these drugs are approved on the formulary for the treatment of diabetes.

4) Manufacturer Assistance

To help offset increasingly high drug costs, many drug manufacturers now offer financial assistance on certain specialty medications. These manufacturer assistance programs help lower your clients’ costs while protecting the plan design integrity.

These two program options are commonly available:

  • Accumulator Protection: When a member goes to the pharmacy to fill their prescription, any available manufacturer funds are applied to cover the member’s copay, lowering their overall out-of-pocket expenses. Accumulator Protection programs ensure that the amount paid by the manufacturer doesn’t apply to the member’s deductible or out-of-pocket totals, protecting the integrity of the plan design.
  • Variable Cost-Share: At times, a member’s copay may be significantly less than the total available manufacturer dollars (i.e., the member’s copay for a $10,000 medication is $100, but up to $1,000 in assistance is available from the drug company). With a Variable Cost-Share program in place, the claims system auto-adjusts the member’s copay amount at the point-of-sale to take advantage of all available manufacturer assistance funds, reducing the plan’s expense. In the scenario mentioned above, the copay would adjust to $1,000 in the point-of-sale system. The manufacturer would pay $1,000, the member would pay $0, and the plan would pay $9,000 (saving the client $900).

Optimize Your Clients’ Clinical Solution

A detailed analysis of your pharmacy plan performance data is necessary to ensure you have the best clinical strategies in place to address current and future challenges. You can’t do that unless you have full transparency into your clients’ pharmacy data. Choose a pharmacy benefits partner that provides the insights you require to develop a sustainable clinical solution tailored to your clients.

Payers that tightly manage their pharmacy benefits realize lower spend per member per month and lower year-over-year trend while providing consistent, dedicated care for their members.

The impact of the four clinical strategies discussed in this e-book can vary based on what your clients are doing currently. On average, our analysis has shown the following opportunities for savings:2

  • Formulary Optimization 1.5% – 2%
  • Utilization Management 3% – 5%
  • High-Dollar Claim Reviews 5% – 7%
  • Manufacturer Assistance 2% – 5%

Chapter 4:

Harnessing the Power of Pharmacy Benefits Analytics

Employers today need a proactive, data-driven approach to manage their pharmacy benefits spending. For all the reasons just discussed, it is critical
that you have full visibility into the true performance of your clients’ pharmacy benefits plans. Eliminating waste and increasing value necessitates that you and your clients both understand the financial and clinical risks, as well is the member impact, involved in any decision about their pharmacy benefits plan before making it. But with all the complexity surrounding prescription drugs, it can be challenging to know where to start in your analysis.

A Data-Driven Approach to Optimizing Pharmacy Benefits

The ideal approach to managing pharmacy benefits incorporates both your clients’ complete pharmacy data over time – not book of business data – and specialized expertise. The goal of the data analysis is to develop a detailed plan with tailored recommendations that balance plan savings and member access. The result is a client-aligned pharmacy benefits strategy that helps HR and benefits leaders make the best decisions for their plan and members, effectively giving them the power to choose how to manage their pharmacy benefits program.

A focused approach includes three main phases that when executed together will form a complete pharmacy plan performance evaluation for your clients.

1) Gain Clear Insights with a Retrospective Analysis

2) Develop Actionable, Tailored Recommendations

3) Forecast Budget & Member Impacts

1) Gain Clear Insights with a Retrospective Analysis

A retrospective analysis provides important information about what’s already happened based on pharmacy claims previously submitted. By analyzing the fill dates, drug types, and fulfillment channels in the employer’s pharmacy claims file, you can compare what actually happened to what should have happened, following their current contract. In addition to revealing the prescription drug cost and utilization drivers impacting your clients’ specific pharmacy benefits plan, a retrospective plan performance evaluation should compare their actual plan performance to contract terms, analyze pricing and rebate opportunities, and assess clinical (utilization management) program performance. Finally, with the right expertise and knowledge, you can pinpoint the group’s risk areas and clinical opportunities.

Contract Terms, Pricing and Rebates

First, examine the pharmacy benefits contract with detailed oversight. This is accomplished by reviewing each aspect of your clients’ pharmacy benefits contract line-by-line. The goal is to compare their plan performance against their agreement to monitor compliance with all terms, discounts, and rebates, as well as to ensure that your clients’ guaranteed terms are met.

Generally, you want to be able to answer these key contract questions:

  • How does the group’s contract terms compare to other arrangements?
  • How does the group’s drug mix compare to industry averages?
  • What are the savings opportunities, based on current pricing and rebates available in the market?
  • How does the group’s contract and effective rates compare to some of the top contracts in the market?
  • How would the group’s members and formulary be impacted based on your findings and recommendations?

Drug Utilization and Clinical Opportunities
Next, it’s important to filter your clients’ claims data to identify specific clinical risk areas impacting their pharmacy benefits plan. Good pharmacy plan reporting covers costs, utilization, and trend – but you want to be sure the data drills into your clients’ plan performance from various perspectives, from overall plan metrics down to drug level or member level detail. This ability to drill down is what makes proactive program management possible.

To gain insight into prescription medication usage, you will want to identify which drugs are being used by the plan, to the member level, from both a cost and utilization perspective. Member populations can be examined based on disease state (e.g., diabetes, hepatitis C), drug/category (opioids, cardiovascular,
anti-inflammatory, etc.) or demographics.

2) Develop Actionable, Tailored Recommendations

With their pharmacy plan spend and utilization data analyzed, it is time to formulate recommendations to identify, design, and implement solutions
that address any challenges or potential inefficiencies that were discovered and to help your client achieve their pharmacy-related goals. Your action plan should be developed carefully, utilizing pharmacy expertise independent of the pharmacy benefit manager (PBM) or insurance carrier, and contain the best opportunities for plan design and clinical changes that can help your clients strike the delicate balance between offering a robust benefit, minimizing member disruption, and achieving cost savings.

The action plan should focus on targeting patient behavior and include clinical and trend management recommendations that align with each client’s objectives. A tailored, expert review of the entire plan and contract can provide recommendations to further improve the pharmacy benefits arrangement.

Taking into consideration market trends and projections, your recommendations may address:

  • Plan design changes
  • Administrative deficiencies
  • Recommendations for corrective action
  • Claims cost management features that can enhance the value of the plan
  • Potential negotiation points on future contract and pricing terms

3) Forecast Budget and Member Impacts

Next, it’s time to model the benefits cost-savings and member impact of potential changes to your clients’ pharmacy plan. The goal with benefits forecasting is to ensure your clients are completely comfortable knowing they have all of the information needed to make the best decisions for their plan and members.
Before advising your clients on any decisions, such as changing the pharmacy benefits plan design or implementing a new clinical program, you want to show your clients that you’ve considered all aspects of the recommended plan of action.

It takes a higher level of expertise to know how to gather those figures, but these questions can help guide you to the information you will want to pull:

  • How will this impact the group’s members?
  • How will this affect the group’s pharmacy benefits budget?
  • What is the anticipated return on investment for this decision?
  • What are the long-term and short-term considerations for this recommendation?

Giving Your Clients the Power to Choose

The value of providing each client with a detailed report and recommended strategies, accompanied by the forecasted savings and potential member
impact, cannot be overstated. By understanding each of your clients’ specific risks and opportunities, you can help them avoid costly surprises. When the next high-cost drug hits the market or when a member gets prescribed an expensive medication for off-label purposes, your clients’ pharmacy benefits plan will have the necessary programs in place to address it. All because you had the analytics and expertise to put costsaving mechanisms in place ahead of time.

Furthermore, when you arm your clients with a comprehensive analysis and let them decide how to effectively manage their plan, you are fulfilling your role as a trusted employee benefit consultant. You are giving your clients control over their pharmacy benefits plan and showing that you can be relied on to serve their best interests. Only then can you help them select the best pharmacy benefits partner and plan options that deliver the best pricing, clinical oversight aligned only with their objectives, and a consistent service experience.

When you arm your clients with a comprehensive analysis and let them decide how to effectively manage their plan, you are fulfilling your role as a trusted employee benefit consultant.

Plan Performance Evaluation Options

Conducting an annual pharmacy plan performance evaluation is the only way to know that your clients’ prescription drug rates and rebates are competitive, contract terms are aligned to them vs. the vendor, and that their clinical management strategies are effective. When comparing the economics of your clients’ current pharmacy benefits deal to other options in the market, you want to make sure your evaluation provides a true apples-to-apples perspective.
Granted, this isn’t a small undertaking. These evaluations can be complicated, tedious, and time-consuming to perform. If you’re like most employee benefits consultants, you probably don’t have the time or cost-effective resources at your disposal to get this done, at least not with a high degree of accuracy for every single case.

In general, these three options are commonly used to perform these in-depth evaluations:

Running the Analysis Yourself

This option is the most common and is done using quotes directly from the PBM vendor or health plan. However, the trouble with using quotes to test the market is that the proposals can be laden with so many assumptions and exclusions, it can be near impossible to formulate a true comparison. In this environment, even the best group representative from the PBM or health plan is focused on the profitability of their accounts and their underwriting processes. In the end, your efforts may produce a result very different from reality.

Conducting an RFP

A Request for a Proposal can be an incredibly complicated process. An RFP requires a tremendous amount of pharmacy expertise and time to formulate appropriate questions and sift through hundreds of pages of responses. It carries many of the same challenges as the previous option, and you should be aware that the PBM or health plan is focused on their profitability, not your clients. If not done properly, this process can produce less than adequate results.

Hiring a Third-Party Consultant

Using an independent consultant to run an evaluation or RFP process may work okay in the jumbo end of the market, but it rarely produces optimal results for non-Fortune 100 employers. Because the big three PBMs do not typically pursue the middle market, you will be forced to lean heavily on regional PBMs and end up with an inferior deal. Regional health plans or PBMs lack the size and scale needed to drive a volume price for your clients, resulting in an incomplete solution that delivers either a competitive pharmacy benefits contract or the lowest net cost drug utilization – not both.

When Market Checks Don’t Deliver

Some PBM contracts have a clause allowing your clients to conduct a periodic market check. Such provisions may appear to give you and your clients the ability to benefit from pricing changes in the market while in a long-term contract. However, this PBM clause provides a false sense of security and stability. Many times – after doing all the legwork – the PBM only allows pricing improvements to apply if the market check shows the savings would meet a minimum amount, such as five percent (red flag!). PBMs also may require that market check results be from identical groups, down to matching characteristics like mail utilization or generic dispensing rates. As a result, many employers never see updates to their pricing after completing the market check.

Best Practices: Renew your clients’ pharmacy benefits contract annually.

Employers on an annual pharmacy benefits contract averaged near an 11% pricing improvement year-over-year compared to 2%-3% on a three-year contract.2

A Better Option: Empowering You with Powerful Insights

Since 1995, RxBenefits has set itself apart by providing a comprehensive, detailed, and timely pharmacy financial analysis for free to help employee benefits consultants quickly cut through the complexity inherent in self-funded pharmacy arrangements. As the industry’s first and only Pharmacy Benefits Optimizer (PBO), we can help you streamline the pharmacy performance evaluation process to serve and protect the interest of your clients more effectively. All we need is a contract and a claim file to provide full visibility into the competitiveness of the rates and rebates, optics related to the contract terms, and clinical inefficiencies–all of which can lead to an underperforming pharmacy plan and an at-risk client.

Whether your clients have pharmacy benefits that are carved-in with a health plan or in a carved-out arrangement, our job is to help you proactively identify risks and uncover substantial savings opportunities for your clients. We realize not every case is going to be a fit for RxBenefits, and that’s okay. Regardless, we want to be your go-to pharmacy resource —the partner you trust to provide the visibility you need to play offense—not defense—with your book of business. Our PBO team functions as independent advisors, providing you and your clients greater transparency of each employer’s pharmacy arrangement, clinical programs, and performance. Our goal is to help you and your clients make the best, most informed decision possible to meet their pharmacy savings and access objectives.

Let RxBenefits provide the visibility you need to proactively address your clients’ needs and stay ahead of the competition.

  1. Competitiveness of Rates and Rebates
  2. Impact of Contract Terms
  3. Effectiveness of Clinical Management

It’s time to put the benefit back in pharmacy benefits.

Sources

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  14. Kline. Growth of Biologics and Biosimilars Will Drive Above-Average Demand For A Range Of Ingredients Through 2023. Biosimilar Development News, Sept. 30, 2019.
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